- The number of zombie companies ebbs and flows with economic cycles and usually increases during recessionary periods.
- Diebold Nixdorf (DBD): The ATM machines business contributes to top-line growth as customers increasingly shift toward automation and self-service.
- Mattel (MAT): The toy company plans to produce more than a dozen movies, including the highly anticipated Barbie movie in 2023.
- Senseonics Holdings (SENS): The stock’s short interest ratio is almost 20%, which can result in rapid short-squeeze moves.
Zombie companies, are companies that barely generate enough cash to continue operations. They also find it difficult to service the interest on their debt. As a result, they primarily rely on loans from creditors and external sources to stay afloat.
InvestorPlace readers may already know that such companies lack excess capital to fuel growth and are particularly exposed to market disruptions. In addition, the number of zombie companies tends to increase in recessions and fall during expansions.
The Federal Reserve (Fed) suggests that roughly 10% of public firms and 5% of private firms in the U.S. were considered zombies between 2015 and 2019. Meanwhile, global consulting firm Kearney recently revealed that the number of zombie companies almost tripled over the past decade. The unprecedented expansionary fiscal and monetary policies during the recent pandemic may have contributed to a significant surge in zombie companies.
Most such firms are rated speculative-grade. Therefore, investors should analyze zombie stocks carefully, and not over-allocate their portfolios. With that information, here are three zombie stocks that could still have upside potential despite their uncertain prospects.
Diebold Nixdorf (DBD)
Our first zombie stock is Diebold Nixdorf (NYSE:DBD), which provides software and hardware services for the financial and retail industries. Its ATM machines business has been important for sales growth. In addition, management is currently focusing on the high-growth electric vehicle (EV) charging stations market.
Diebold Nixdorf released Q4 2021 results on Feb. 10. Revenue declined 4.2% year-over-year (YOY) to $1.06 billion. Adjusted diluted earnings-per-share plunged to 6 cents, down from 44 cents a year ago.
Meanwhile, the company generated $407 million in free cash flow. Cash and equivalents ended the period at $389 million. However, $2.25 billion in long-term debt continues to cast a shadow over the company’s balance sheet.
At the start of 2022, the company received contracts for several thousand charging stations stateside as well as in Europe. Diebold Nixdorf plans to service over 30,000 EV charging stations by 2023.
DBD stock has declined 58% year-to-date (YTD). Shares are trading at 2.52 times forward earnings and just 0.08 times trailing sales. The 12-month median price forecast for Diebold Nixdorf stock stands at $10.50, implying significant upside potential.
Next up is the global toy group Mattel (NASDAQ:MAT). Its well-known brands include Barbie, Hot Wheels and Fisher-Price.
The toymaker announced Q1 2022 results on Apr. 27. Revenue increased 19% YOY to $1.04 billion. Adjusted earnings-per-share came in at 8 cents, compared to an adjusted loss per share of 10 cents in the prior-year quarter. Yet, the company burned $180 million in free cash flow during the quarter.
In January, Mattel signed a deal with Disney (NYSE:DIS). As a result, “Mattel will have the global licensing rights to develop lines of toys for Disney Consumer Products, Games and Publishing, including fashion dolls, small dolls, and figures.”
Mattel shares recently soared over 10% on news that management is holding early stage discussions with at least two high-profile private equity firms. The result could be a potential buyout of the toy company.
To the delight of shareholders, MAT stock has appreciated almost 14% YTD. It is trading at 16.6 times forward earnings and 1.55 times trailing sales. At present, the 12-month median price forecast for Mattel stock is at $45.
Senseonics Holdings (SENS)
Our last zombie stock is Senseonics Holdings (NYSEAMERICAN:SENS), which has a market capitalization (cap) of roughly $685 million. This small healthcare technology company develops continuous glucose monitoring (CGM) systems for people with diabetes. Senseonics has the first-ever implantable CGM system on the market, Eversense, that relays results to a smartphone app every 5 minutes.
Management reported Q4 2021 results on Mar. 1. Revenue stood at $4 million, up from $3.9 million in the prior-year quarter. Net income came in at 19 cents per share, compared to a net loss of 41 cents per share a year ago. Cash and equivalents ended the 2021 fiscal year at $182 million against $107 million in debt.
In February, Senseonics announced the Food and Drug Administration’s (FDA) approval of the new Eversense E3. It can stay in the body for six months and will become available to patients stateside in Q2.
Despite the promising development, SENS stock has dropped 52% YTD. Yet shares are not cheap at 43.2 times trailing sales. The 12-month median price forecast for Senseonics Holdings stock stands at $2.50.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.